| RESPIRONICS INC Item 1A Risk Factors The following factors, among other items, could cause the Company’s future results to differ from those contained in forward-looking statements made in this report and presented elsewhere by management from time-to-time |
| Such factors, among others, may have a material adverse effect on the Company’s business, financial condition and results of operations |
| The Company operates in a dynamic and competitive environment |
| New risk factors affecting the Company emerge from time-to-time and it is not possible for management to predict all such risk factors |
| Further, it is not possible to assess the impact of all risk factors on the Company or the extent to which any individual factor or combination of factors may cause actual results to differ materially from those contained in any forward-looking statements |
| Due to these inherent risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results |
| Additionally, the Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise |
| The following discussion of the Company’s risk factors speaks only as of the date on which they were made and should be read in conjunction with the consolidated financial statements and related notes included herein |
| Because of these and other factors, past financial performance should not be considered an indication of future performance |
| INDUSTRY RISKS The Company participates in a highly competitive environment |
| The markets the Company participates in are highly competitive and are characterized by frequent product improvements and evolving technology |
| The Company’s ability to compete successfully depends, in part, on its ability to develop, manufacture and market innovative new products |
| The development of innovative new products by competitors or the discovery of alternative treatments or potential cures for the conditions that the Company’s products treat could make Respironics’ products noncompetitive or obsolete |
| Additionally, some competitors may have greater financial, research and development, manufacturing and marketing resources than Respironics |
| The consolidation by the Company’s competitors could result in greater competition |
| Increased competition could lead to greater increases in pricing pressure |
| If innovative new products cannot be developed, the Company may not be able to maintain competitive pricing and market share |
| The decline in the availability of, or the increase in cost of raw materials could increase the Company’s costs of producing its products or limit the Company’s ability to meet sales demand |
| The Company generally performs all major assembly work on all of its products |
| It manufactures many of the plastic components for its face mask products and uses subcontractors to supply certain other components, including printed circuit boards, motor / blower assemblies, and plastics |
| The Company purchases the component parts for its major products from a number of different suppliers |
| Where appropriate, the Company employs contracts with its suppliers, both domestically and internationally |
| The Company believes that its relationships with its suppliers are satisfactory and that alternative sources of supply are available |
| The raw materials used in the Company’s components have historically been readily available |
| However, loss of a key supplier or access to certain raw materials could have a material adverse impact on the Company |
| From time-to-time, the prices and availability of these raw materials may fluctuate due to global market demands, which could impair the Company’s ability to procure necessary materials, or could increase the cost of such materials |
| Inflationary and other increases in costs of these raw materials may occur from time-to-time |
| In addition, freight costs associated with shipping and receiving product are impacted by fluctuations in the cost of oil and gas |
| A reduction in the supply or an increase in the cost of those raw materials could impact the Company’s ability to manufacture its products and could increase the cost of production |
| The Company is subject to substantial domestic and international government regulation, including regulatory quality standards applicable to its manufacturing and quality processes |
| Failure by the Company to comply with these standards could have an adverse effect on the Company’s business, financial condition, or results of operations |
| The FDA regulates the approval, manufacturing, and sales and marketing of many of the Company’s products in the US Significant government regulation also exists in Canada, Japan, Europe, and other countries in which the Company conducts business |
| As a device manufacturer, the Company is required to register with the FDA and is subject to periodic inspection by the FDA for 18 ______________________________________________________________________ [44]Table of Contents compliance with the FDA’s Quality System Regulation (“QSR”) requirements, which require manufacturers of medical devices to adhere to certain regulations, including testing, quality control and documentation procedures |
| In addition, the federal Medical Device Reporting regulations require the Company to provide information to the FDA whenever there is evidence that reasonably suggests that a device may have caused or contributed to a death or serious injury or, if a malfunction were to occur, could cause or contribute to a death or serious injury |
| Compliance with applicable regulatory requirements is subject to continual review and is rigorously monitored through periodic inspections by the FDA In the European Community, the Company is required to maintain certain ISO certifications in order to sell its products and must undergo periodic inspections by notified bodies to obtain and maintain these certifications |
| Failure to comply with current governmental regulations and quality assurance guidelines could lead to temporary manufacturing shutdowns, product recalls or related field actions, product shortages or delays in product manufacturing |
| Efficacy or safety concerns, an increase in trends of adverse events in the marketplace, and/or manufacturing quality issues with respect to the Company’s products could lead to product recalls or related field actions, withdrawals, and/or declining sales |
| From time-to-time the Company is required to conduct product recalls and/or field actions associated with certain of its products |
| The Company is currently conducting certain recalls and is investigating certain customer product complaints |
| The Company has accrued for the anticipated costs associated with these product matters in its consolidated balance sheets as of June 30, 2006 and 2005 |
| There can be no assurance these accruals are adequate to cover the actual costs incurred related to these items |
| The pricing, sales and marketing programs and arrangements, and related business practices of the industry are under increasing scrutiny from federal and state regulatory, investigative, prosecutorial and administrative entities |
| These entities include the Department of Justice and its US Attorney’s Offices, the Office of Inspector General of the Department of Health and Human Services, the FDA, the Federal Trade Commission and various state Attorneys General offices |
| Many of the healthcare laws under which certain of these governmental entities operate, including the federal and state anti-kickback statutes and statutory and common law false claims laws, have been construed broadly by the courts and permit the government entities to exercise significant discretion |
| In the event that any of those governmental entities believes that wrongdoing has occurred, one or more of them could institute civil or criminal proceedings, which, if instituted and resolved unfavorably, could subject the Company to substantial fines, penalties and injunctive or administrative remedies, including exclusion from government reimbursement programs |
| The Company also cannot predict whether any investigations will affect its marketing practices or sales |
| Any such result could have a material adverse impact on the Company’s results of operations, cash flows, financial condition, or its business |
| Sales may decline if the Company’s customers do not receive adequate levels of reimbursement from third-party payors for the Company’s products and if certain types of healthcare programs are adopted in the Company’s key markets |
| In the United States, healthcare providers that purchase the Company’s products generally rely on payments from third-party payors (principally federal Medicare and private health insurance plans) to cover all or a portion of the cost of the Company’s products |
| In the event that third-party payors deny coverage or reduce their current levels of reimbursement, the Company may experience increased selling price pressure and/or weakened demand for its products |
| Further, third-party payors are continuing to carefully review their coverage policies with respect to existing and new therapies and can, without notice, deny coverage for treatments that may include the use of the Company’s products |
| Outside the US, reimbursement systems vary significantly from country-to-country |
| In the majority of the international markets in which the Company’s products are sold, government-managed healthcare systems mandate the reimbursement rates and methods for medical devices and procedures |
| If adequate levels of reimbursement from third-party payors outside of the US are not obtained, international sales of the Company’s products may decline |
| Many foreign markets, including Canada, and some European and Asian countries, have tightened reimbursement rates |
| The ability of the Company to continue to sell certain of its products profitably in these markets may diminish if the government-managed healthcare systems continue to reduce reimbursement rates |
| 19 ______________________________________________________________________ [45]Table of Contents A natural or man-made disaster could have a material adverse effect on the Company’s business |
| The Company has approximately ten manufacturing operations located throughout the world |
| However, a significant portion of the Company’s products are produced at its facility in Murrysville, Pennsylvania |
| In the event that this facility or any other significant facility were severely damaged or destroyed as a result of a natural or man-made disaster, the Company would be forced to shift production to its other facilities and/or rely on third-party manufacturers |
| Such an event could have a material adverse effect on the Company’s business, results of operations and financial condition |
| The Company also operates a substantial amount of its business transactions on an integrated enterprise resource planning system |
| Failure by the Company to protect its systems from a cyber attack or other security breach could have a material adverse impact on the Company |
| COMPANY RISKS The Company’s future profitability depends on the success of the Company’s principal product lines |
| Sales of the Company’s sleep apnea products accounted for approximately 54prca of the Company’s net sales for the year ended June 30, 2006 |
| The Company expects sales of sleep apnea products to continue to account for a significant portion of the Company’s aggregate sales |
| Any event adversely affecting the sale of sleep apnea products may, as a result, adversely affect the Company’s business, results of operations and financial condition |
| The success of the Company depends on its ability to effectively market to home healthcare providers and sleep laboratories |
| The Company markets certain products primarily to homecare providers and to sleep clinics that diagnose OSA and other sleep disorders |
| The role of homecare providers and sleep laboratories is significant in the determination of the brand of product a patient will use |
| The Company’s success depends on its ability to effectively market its products to homecare providers and sleep laboratories |
| The Company markets to approximately 3cmam500 US sleep laboratories and approximately 6cmam500 homecare providers, most of which use, sell or recommend multiple brands of products |
| Declining governmental and third-party reimbursement amounts have caused pricing pressure on homecare providers |
| Due to this, homecare providers may require price discounts and longer periods of time to pay for products purchased |
| The Company cannot assure that sleep physicians will continue to prescribe Respironics’ products, or that homecare providers or patients will not substitute competing products when a prescription specifying the Company’s products has been written |
| Marketing activities targeted toward the population with a predisposition to sleep-disordered breathing, as well as primary care physicians and various medical specialists’ are ongoing |
| The Company cannot assure that these marketing efforts will be successful in increasing awareness of OSA or sales of Company products |
| The inability to support continued growth could negatively impact the Company |
| The Company has experienced substantial growth |
| The effective management of growth depends upon, among other things, the ability to monitor and improve manufacturing systems, information technology, quality and regulatory compliance systems, and financial and management reporting systems |
| The failure to attract and retain qualified employees, the failure to manage costs, or the inability to support current and future growth could negatively impact the Company |
| The Company’s revenues are subject to risks arising from currency exchange rate fluctuations, which could adversely affect the Company’s results of operations or financial position |
| During fiscal year 2006, sales of the Company’s products in foreign markets approximated dlra178cmam814cmam000 or 17prca of the Company’s total revenues |
| Accordingly, the US dollar value of the Company’s foreign-generated revenues varies with currency exchange rate fluctuations |
| Currency exchange rates are subject to fluctuation due to, among other things, changes in local, regional, or global economic conditions, the imposition of currency exchange restrictions, and unexpected changes in regulatory or taxation environments |
| The local country currency of the Company’s subsidiaries outside the US is the predominant currency used by the subsidiaries to transact business |
| Through its international operations, the company is exposed to foreign currency fluctuations, and changes in exchange rates can have a significant impact on the Company’s results of operations |
| 20 ______________________________________________________________________ [46]Table of Contents The Company is subject to certain risks inherent in managing a global and decentralized organization |
| The Company has significant international operations and operates under a decentralized operational structure |
| Certain risks are inherent in operating and selling products in a global and decentralized organization, including: • Difficulties in enforcing agreements and collecting receivables through certain foreign legal systems; • Foreign customers who may have longer payment cycles than customers in the US; • Tax rates in certain foreign countries that may exceed those in the US, and foreign earnings that may be subject to withholding requirements; • The imposition of tariffs, exchange controls or other trade restrictions including transfer pricing restrictions when products produced in one country are sold to an affiliated entity in another country; • General economic and political conditions in countries where the Company operates or where end users of the Company’s products reside; • Difficulties in enforcing intellectual property rights and weaker intellectual property rights protection in some countries; • Required compliance with a variety of foreign laws and regulations; and; • Other difficulties associated with managing a decentralized organization |
| The inability to effectively market the Company’s products outside the US could adversely impact profitability |
| Approximately 30prca of the Company’s revenues are generated outside the US, in approximately 131 different countries |
| Many of these countries have unique regulatory, medical, and business environments |
| The inability to effectively market the Company’s products outside the US could have an adverse impact on the Company’s business, results of operations and financial condition |
| The Company’s acquisition and strategic investment activity may not be successful |
| As a part of the Company’s growth strategy, the Company seeks to make strategic investments and acquisitions of companies, products, and technologies to expand its presence in the sleep and respiratory markets |
| The Company may not be able to successfully manage and integrate future acquisitions and strategic investments |
| There are no assurances that any acquisition or investment opportunities will arise or if they do, that they will be consummated, or that any needed additional financing will be available on satisfactory terms when required |
| In addition, acquisitions and strategic investments involve risks that the businesses, products or technology acquired will not perform in accordance with expectations, that business judgments concerning the value, strengths and weaknesses of businesses or technology acquired will prove incorrect, that the acquired businesses or technology may not be integrated successfully, and that the acquisitions may strain management resources |
| The integration of operations of acquired companies, including the consolidation of systems, procedures, personnel and facilities, the relocation of staff, and the achievement of anticipated cost savings, economies of scale and other business efficiencies, presents significant challenges, particularly if several acquisitions occur within a short period of time |
| The Company may not be able to successfully integrate any business, products, technologies or personnel that may be acquired in the future, and the failure to do so could adversely affect the Company |
| The Company may be adversely affected by the outcome of legal proceedings |
| The Company may be party to various legal proceedings which could result in substantial costs and could harm the Company’s on-going operations |
| The results of legal proceedings are difficult to predict |
| The Company cannot provide assurance that an action or proceeding will not be commenced against it, or that the Company will prevail in any such action or proceeding |
| An unfavorable resolution of any legal action or proceeding could materially and adversely affect the Company’s business, results of operations, liquidity or financial condition |
| The Company does accrue for the anticipated costs associated with legal matters in its consolidated balance sheets as of June 30, 2006 and 2005 |
| There can be no assurance these accruals are adequate to cover the actual costs incurred related to these matters |
| The Company’s intellectual property rights may expire, or they may not sufficiently protect its products, or the Company’s products may infringe on the intellectual property rights of third parties |
| The Company relies on a combination of patents, trade secrets and non-disclosure agreements to protect its intellectual property |
| The Company’s success depends, in part, on its ability to obtain and maintain US and foreign patent protection for its products |
| The Company currently has a number of pending patent applications |
| It is not possible to determine whether the Company will obtain any patents from these applications |
| Additionally, the claims in previously issued patents or pending applications may not provide the Company with significant protection against competitive products or otherwise be commercially valuable |
| Additionally, third party patents, patent applications, and other intellectual property, which are not known to the Company, may block or compete with the Company’s existing product lines |
| 21 ______________________________________________________________________ [47]Table of Contents Litigation may be necessary to enforce the Company’s patents, to protect existing proprietary rights, or to defend third party infringement claims |
| The defense and prosecution of patent claims, including these pending claims, as well as participation in other inter-party proceedings, can be expensive and time consuming, even in those instances in which the outcome is favorable |
| If the outcome of any litigation or proceeding were adverse, the Company could be subject to significant liabilities to third parties, could be required to obtain licenses from third parties, may be forced to redesign or rename its products, or could be required to cease sales of the affected products |
| Additionally, the laws regarding the enforceability of patents vary by country; therefore, any patent issues faced by the Company may not be uniformly resolved |
| The Company is exposed to certain credit risks, resulting primarily from customer sales |
| Substantially all of the Company’s receivables are due from homecare providers, distributors, hospitals, and independent leasing companies |
| The Company’s customers are located throughout the US and around the world |
| A significant portion of products sold to providers, distributors and hospitals, both foreign and domestic, is ultimately funded through government reimbursement programs or through private insurance programs |
| As a consequence, changes in these programs can have an adverse impact on the liquidity and profitability of the Company’s customer base |
| In addition, because a concentration of market share exists in the sleep and home respiratory product industry in the US among national and large regional homecare providers, the Company experiences a comparable concentration of credit risk with these customers |
| The Company records an estimated allowance for uncollectible amounts based primarily on the Company’s evaluation of the payment pattern, financial condition, cash flows, and credit history of its customers as well as current industry and economic conditions |
| Respironics’s inability to collect on its trade accounts receivable from major customers could substantially reduce the Company’s income and have a material adverse effect on its financial condition and results of operations |